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VENTURES: Too Much Focus on Late Stage Investment

 



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With international markets in turmoil, the healthy future of the South African economy depends not only on foreign, local and BEE investment into later stage businesses, but also on developing a pipeline of sound, supported and empowered growing South African businesses.

This is the view of Julia Long, CEO of Cape Town-based Here Be Dragon (HBD) which is the venture capital company set up by Mark Shuttleworth. Long is concerned that too much focus is given to investment into mature businesses in South Africa, creating a possible problem in 10 to 20 years time when the gap in the pipeline will be felt with too few growing businesses of a medium size coming on to the market for possible foreign and local investment.

“Lack of investment in new and early stage businesses can upset the entire cycle of business growth,” says Long. “Later stage investing has kept private equity companies very busy in the last few years, and not enough attention has been given to developing smaller businesses.”

Long is also concerned that when focus is given to growing businesses, that too much money is often given too soon. This can strip the entrepreneur of too much equity in his or her own business.

“Getting the right investment at the right stage of a business is critical to success,” says Long. “The reason for this is that if not enough tangible value can be shown in the early stages, then entrepreneurs generally need to give up a bigger part of the ownership of the business for a smaller investment amount. Whereas if the entrepreneur has used his or her own means to take the business as far as possible, then he or she will be able to have developed more value in the business and ask a higher investment amount for a smaller stake.

“By way of tangible example, an idea is difficult to quantify but value can more easily be attributed to a patented idea. One could get funding at this stage, or the entrepreneur could go on and develop a prototype and perhaps even acquire a beta customer to add further value before seeking funding.”

Long points out that the private equity companies in South Africa have done well by focusing on big business in the last few years. Yet true venture capital – the space in which HBD operates – remains small in South Africa with high risk attached.

“Venture capital has an important role to play in the SA economy,” says Long. “Without it, small business would stay small forever.

“HBD is fortunate that through Mark Shuttleworth and the team’s experience in fast growing businesses, the company is able to offer both monetary and advisory venture capital support to growing SA business. One also has to be realistic that not every business is going to be successful – and for every spectacular success story, there are many new businesses that do not make it.”

There are many examples in the SA economy of entrepreneurs who started out small with the courage to succeed through thinking big and lots of determination. Examples include Pick 'n Pay, Nando’s and Mr Price to name a few. Even Google began as an idea which required an early stage investor who believed the idea could work.

Long’s advice to SA’s entrepreneurs is to build slowly, learning along the way, and to let their own funding take them as far as it can. Thereafter they should look at the various funding options available to them and pick the appropriate funding for the business stage and size.


 
 
 
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